Even if the national debt is never repaid, taxpayers bear it economically over time by perpetually paying interest on the debt. Nor would defaulting on our debt obligations eliminate the cost of paying for government spending. Default would merely shift the cost from taxpayers to bondholders—functioning, in effect, as a one-time tax on the latter. When I use the term tax lag, the reader should keep in mind that I am describing the relative timing of taxes and spending, rather than anything absolute about taxation.
I could just as easily refer to spending acceleration. Tax lag can be reduced through policy changes either on the tax side or on the spending side of the federal budget. On the spending side, one can reduce planned present or future spending, in particular that on behalf of current generations and older individuals.
The most intuitively obvious way to measure changes in tax lag would be through what I call the economic accrual budget deficit as distinct from the cash flow budget deficit that we currently use. This measure—which I mean only as a thought experiment—would focus on economic accrual over time, rather than cash flow, by taking account of expected future revenues and outlays at their interest-adjusted present value. This would be the "economic accrual national debt. The measure, as I have described it thus far, would still be too cash flow-oriented in a critical respect.
It would fail to distinguish between expenditures that create durable government assets, and those that are immediately consumed. Recall my earlier point that spending a thousand dollars to buy a house is quite different from spending that amount at the racetrack. To the extent feasible, one would want to adjust the economic accrual budget deficit to use standard principles of accrual accounting for government expenditures.
At a minimum, expenditures that created lasting government assets would be deducted over their estimated useful lives, rather than in the year of the expenditure. One might also want to consider adjusting for fluctuations in the value of government assets at least those plausibly held for sale, if not, say, the Lincoln Memorial , and ignoring government asset sales that merely convert property to cash.
Yet, even if one could make these adjustments, another problem would arise. This enactment probably would not alter one's view of our current fiscal policy, whether because it seemed frivolous or because the bottom line, the fact that taxes ultimately will pay for today's spending, was already implicit.
This suggests two problems with the economic accrual budget deficit. The more trivial one is that the set of tax and payment rules currently on the books is less important, for some purposes, than the set of rules that actually, credibly constitute our current policy.
The more fundamental problem is that what really matters about taxes and spending, at least distributionally, is who pays for and receives them. A tax on younger generations in fifty years may be quite different than a tax on us today, even if the taxes have the same present value.
Responding to these problems in measuring tax lag, the economist Laurence Kotlikoff has proposed a new measurement system to replace the cash flow budget deficit that, while less intuitive than the economic accrual budget deficit, provides more meaningful information. He calls it generational accounting. Its most important innovation, beyond employing principles of economic accrual, is that it compares expected taxes to expected outlays by age group, rather than providing a single overall measure of tax lag.
Generational accounting involves computing the estimated lifetime net tax payment and lifetime net tax rate for the average member of an age group—those born, say, in , , , or the future—assuming the continuation of current policy except that future generations are deemed to make up all the long-term revenue shortfalls.
The lifetime net tax payment is the excess of taxes paid over transfers received, computed on a lifetime basis in present value terms from birth.
The lifetime net tax rate is the lifetime net tax payment, divided by estimated lifetime income. Generational accounting thus directly addresses which age groups win and lose under fiscal policy, and sheds light on such policy's likely sustainability. According to Kotlikoff, lifetime net tax rates have been rising throughout the twentieth century, and now stand at astronomical levels for future generations—more than 84 percent under current policy, according to his most recent data.
Unfortunately, any long-term economic accrual measure involves conceptual and computational difficulty. In calculating future years' tax and spending levels, what set of policies should we assume will be followed? How confident can we be in any long-term economic and demographic forecasts? Should mere expectations of benefiting in future years from government spending programs be distinguished from explicit public debt? Can we really determine the incidence, within a multi-generational household, of government taxes and transfers?
While these problems reduce generational accounting's practical value—especially given estimating games in the real world of partisan politics—it remains conceptually superior to the cash flow budget deficit. Generational accounting requires extensive assumptions, but at least it sets forth a meaningful economic concept.
Moreover, it addresses an important gap in current understanding. While political debate has moved in the direction of focusing on long-term economic accrual as through multi-year deficit forecasts and debate about the long-term solvency of Social Security and Medicare , it has tended to ignore the generational implications of alternative policies. Still, despite the importance of focusing on long-term accrual and on who pays what, discussion of the cash-flow budget deficit is not wholly without value, as long as we keep its limitations in mind.
Major deficit reduction initiatives in Congress often would reduce tax lag, even if they also include smoke-and-mirrors elements. One could even argue that the deficit has particular advantages as a guide for public political discourse, despite its conceptual flaws, because of its greater salience and symbolic heft.
So far, the discussion has been limited to fiscal policy, which concerns cash flows to and from the government. This focus is incomplete, since cash transactions represent only a part of total government activity. Whether we like it or not, what happens to the federal debt can actually have very real consequences on our daily lives. Read more: Food will likely get even more expensive. What does the election mean for your grocery bill?
That means for the average Canadian, six per cent of what you pay in taxes is actually covering the interest on debt. You could end up paying a slightly higher percentage of GST on the things you buy. Your taxes could go up.
Services could be slashed. World Canada Local. Do deficits matter? Alternatively, it could increase the interest rate it pays on bank reserves to track market rates. Successful stimulus policies lead to faster growth and higher interest rates over time. The national sales tax rate rose from 3 percent to 5 percent in , then to 8 percent in , and then 10 percent in Further increases are almost inevitable. Large deficits impose costly burdens on future taxpayers.
The lesson? Look for the current fiscal stimulus in the United States to lead to higher taxes in the future, perhaps as soon as View the discussion thread. Skip to main content. A must-read political newsletter that breaks news and catches you up on what is happening. These large deficits and debt will leave little budgetary room to respond to deep recessions, national security crises, or other emergencies. Generational equity tells us that anything worth doing is worth paying for.
If Washington wants to provide a full range of expensive services and benefits, it should be willing to set priorities, cut lower-priority spending, and raise the required tax revenue.
Lawmakers should aim to minimize budget deficits over the course of the business cycle. Current federal debt trends are unsustainable. And this projection assumes no major wars, recessions, expensive new policies, or significant interest-rate increases. Overall, CBO assumes lost income, less economic growth, and less policy flexibility for future generations. In light of these factors, the most dangerous policy is to keep building debt and then wait and see if a recession or financial crisis occurs.
If it does, lawmakers will be forced to implement drastic fiscal consolidations at a time locked in their Social Security and Medicare benefits. This responsible fiscal stewardship would ensure a soft landing on deficits and strengthen the economy for future challenges. See endnotes in PDF. Your current web browser is outdated. For best viewing experience, please consider upgrading to the latest version.
Contact Send a question or comment using the form below. Full Name Email Subject Message. Cancel Cancel. Email Article. More detailed message would go here to provide context for the user and how to proceed. Manhattan Institute search. Search search. Experts Hea ther Mac Donald. Topics Hea lth Care. Close Nav Search Close Search search. Why Deficits Still Matter. Introduction For decades, a consensus of economic policy experts warned that escalating national debt brings about higher interest rates, larger government interest costs, and slower economic growth.
Why Interest Rates Might Rise In recent years, interest rates have faced downward pressure from the slow growth of the labor force and productivity, a soft-money Federal Reserve, and investor preference for safer assets—factors that may continue to persist.
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